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Management Accounting in the New Economy

Dr. Adel E. A. Abobaker Efkirin


Faculty of Economic
Accounting DepartmentOmar Al-Mukhtar University

Abstract :
This paper aims to theoretically investigate, in order to, explore
management accounting in the current business environment. This is
because of phenomena that have appeared in the last few years, such as
Globalisation, technological advances, deregulation and the economic
transformations in the structure, function and the roles of the economy
which is termed New Economy" which creates challenges for
management accounting and accountants in the future.

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Management Accounting in the New Economy

1- Introduction :
The discussion around Management Accounting (MA) and the New
Economy has significantly intensified in the last two decades (Johnson and
Kaplan, 1987; Jaruga and Ho, 2002; Laitinen, 2003; Carmona and
Gutierrez, 2003; Baines and Smith, 2003). The business environment in
which organisations operated has become more turbulent, uncertain
(Duberley, et. el. 2000; Williams and Seaman, 2002), and fast-changing in
the competitive circumstances. These led to fundamental changes in the
competitive rules, which create radical changes in the strategies adopted by
organisations (Lockamy, 1998). On the other hand, this new environment
drives the strategic formulation and the methods and techniques in which
the organisation operates its activates in order to achieve strategic
objectives, either through anticipation of, or reaction to, major changes in
the marketplace (Laitinen, 2003; Johnny and Gani, 2004).
The economic transformations in the structure, function and the roles
of the economy which is termed New Economy (Bhimani, 2003) has
influenced the role of MA (Szychta, 2002) through creating a complex
business environment. In this environment the success and survival of a

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Dr. Adel E. A. Abobaker Efkirin

business is highly dependent on innovative ideas and technology; risk,


uncertainty and constant change are the main features.
Since accounting is the language of business, (and language being a
means of communication in society) it naturally evolves to reflect the
changes that occur in our environment and adapts to the technological
advances achieved. Accounting is therefore constantly developing in an
endeavour to communicate business information more efficiently and
effectively and to keep pace with a rapidly changing business environment.
Therefore, the rest of this paper is organized as follows. First, the
definition of management accounting; then the main features of the New
economy. The paper ends with summarizing the major effects of the New
Economy on the MA both as an organisational practice and an academic
discipline.

2 Management Accounting (MA) Definition:


MA in simple terms is the branch of accounting, which is responsible
for meeting both the financial and non-financial information needs of
business management; the Balanced Scorecard is an example of one MA
technique that attempts to address these related needs. MA may be defined
as the application of accounting techniques to provide information designed

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Management Accounting in the New Economy

to assist all levels of management in planning, making decisions, and


controlling the activities of an organisation. MA is concerned with the
provision of information to people within the organisation to help them
make better decisions. This is opposed to the role of financial accounting,
which is concerned, with the provision of information to external parties
such as

investors,

government agencies,

regulatory bodies,

and

environmental groups (Drury, 2005).


The management accountant has a whole series of methods and
techniques to calculate how the organisation, department, or individual is
performing. Traditional MA methods such as ROI and subsidiary ratios
were the backbone of most accounting systems. MA was concerned with
such cost accounting issues as the determination of product cost. Johnson
and Kaplan (1987: p. 6), provide a view of the first MA, as this;
accounting reports have been prepared for thousands of years. However, it
was the Industrial Revolution, in the 19th century, which created the
demand for MA information. The objective of the first MA measures was
to provide owners and managers with a picture of the efficiency by which
labour and material were converted to finished products. By 1925,
virtually all MA practices used today had been developed; cost accounts
per labour, material, and overhead; budgets for cash, income, and capital;

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Dr. Adel E. A. Abobaker Efkirin

flexible budgets, sales forecasts, standards costs, variance analysis, transfer


prices, and divisional performance measures (p. 12)
The technology of Production was relatively simple, with products
going through a series of distinct manufacturing processes. The speed of
the manufacturing process was governed by the speed of manual operations
(Ashton et al. 1991). According to Ashton et al. (1991) one of the main
features of this stage (1950s-1970s) in the development of MA was the lack
of academic research concerned with the development of the MA theory.
The application of neoclassical economic theory was adopted as the basis
for the research to deal with the problems of business decision-making and
control. The business objective was the maximization of the wealth of
shareholders.

3- Features of The new economy:


The features of the current environment that govern business refer to
the major changes in the business environment. The economic changes
entailing computer-based information exchanges and sometimes includes
an array of other changes in the nature and functioning of the economy and
related social structures and processes (Bhimani, 2003). This is because of
phenomena that have appeared in the last few years, such as Globalisation,

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Management Accounting in the New Economy

technological advances and deregulation which have stormed the old


economic roles. Dent (1996) states that, challenges arising for MA, and in
particular for planning and control, such as multiple perspectives,
coordination of complexity, competitor analysis, resource allocation and
the development of a clarity of strategic intent, bind managers together
worldwide and reward behaviour in the corporate, as opposed to local
interest.
Globalisation is one of the major changes in the business
environment and together with advances in technology and the
telecommunications revolution, is the most powerful force effecting
business now (Yip, 2000). Baylis and Smith (1997) state that A
globalized world is one in which political, economic, cultural and social
events become more and more interconnected, and also one in which they
have more impact. It has become easier to enter markets anywhere in the
world. On the other hand, the power has transferred from sellers to buyers
who have more choice, and sellers have to respond. Consequently new
vocabularies have appeared in the literature, such as Global Competition,
Global Strategy and Global Market (Wit and Meyer, 1994; Yip, 2000).
The majority of the world markets operate in a dynamic environment as
opposed to a relatively stable environment. However, organisations at

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Dr. Adel E. A. Abobaker Efkirin

present have the advantage of the digital economy allowing high-speed


communication, computerised trading and companies to move their
operations in and out of countries at significant speed.
Deregulation is the loosening of government control over economic
activities. This accelerating trend is driven by the belief that, private sectors
are more efficient than the government in creating value from economic
resource and have the ability to compete better than the public
organisations which are excessively rule-governed and bureaucratic. Public
ownership is particularly poor at forecasting demand and at adapting to
changing conditions (Glaeser and Scheinkman, 1996). In many countries,
the public sector has been inundated with a spate of far reaching
management changes in the last few years (Broadbent et al, 1996).
Privatisation of state-owned enterprises has been a major component of
economic policy in many developed and developing countries in the last
two decades (Saygili and Taymaz, 2001). This has increased opportunities
and created whole new markets whilst also increasing the level of
competition. This also opened up the market to competitors and meant that
huge opportunities were open to organisations that had the ability to meet
customer needs in this new marketplace. Organisations that are aware of

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Management Accounting in the New Economy

regulation changes can react quickly to the opportunities that it can bring
but must also be aware that competition is likely to increase as well.
Technology has changed so rapidly over the last decade that every
industry has been altered by new hardware, software or communication
advancements. These make it easier to find out what the market wants and
quicker to design products and services based on this. The technology also
opens up new distribution channels, again making organisations aware of
new technologies that they must adopt, or they will find themselves left
behind competitors who are quicker to seize new technological
advancements and the advantages they bring (Nixon, 1995).The use of
technological innovation by many of todays businesses is creating a more
volatile and dynamic market place. Advances in technology, such as
Computer-Aided-Design (CAD), Computer-Aided-Manufacturing (CAM)
rapid prototyping and simulation are helping smaller business to be able to
compete for larger market. Also share by simply reaching the market with
their products or services before larger, more established businesses.
Prahalad (1998) recognises eight significant discontinuities that are
shaping the New Economy. Figure (No.1) shows the main forces that shape
the New Economy.

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Dr. Adel E. A. Abobaker Efkirin

Figure (1)

Management Accountants need to take on the task of managing these


discontinuities by absorbing and integrating new streams of knowledge and
collaborating across professional cultures. The change from the industrial
enterprise (old economy) to the knowledge enterprise (New economy) can

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Management Accounting in the New Economy

be seen in Appendix 1. In this new knowledge economy power has firmly


shifted to the customer, resulting in a diminution of monopolisation.
According to Maskell (1991) as the business needs changed, the
information provided by management accounting systems had lost its
relevance. In particular, Maskell argued that MA information was produced
too late and it was too aggregated and too distorted to be relevant for
managers decision making. Johnson and Kaplan (1987) also maintained
that academics had failed to develop new MA concepts to match changes,
notably in manufacturing technology and manufacturing management
methods, and that MA had therefore lost its relevance.
According to Johnson and Kaplan (1987) relevance was lost between
the 1950s and 1980s when management used cost accounting to drive
marketing strategies and control operations. They go on to state that, it is
inconceivable that accounting systems ever can help to control operating
processes in a customer-focused global enterprise. This view is backed by
Dixon et al. (1990) who consider that cost accounting systems are
inconsistent with the new emphasis on quality, JIT and using
manufacturing as a competitive weapon.

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Dr. Adel E. A. Abobaker Efkirin

Over the last decade new MA Theory has been widely written about,
with developments in concepts such as Activity based costing (ABC), total
quality management (TQM) and continuous improvement methodologies
among other (Suwignjo et al, 2000). However, Kaplan (1998) maintains
that big companies operating in todays economy, such as Hewlett-Packard,
Intel, IBM adopt new management technologies-including TQM and Justin-time (JIT), but are still using traditional standard, direct labour focused
costing systems and a monthly system of financial variance reporting
designed decades earlier. He concludes by saying that these companies are
using obsolete assumptions about labour content, process efficiencies and
the drivers of long-term competitive success
The role of MA in the future is predicted to shift from activities such
as activity based management, environmental accounting, enterprise
solutions, balanced scorecard and shared service centre towards
management cockpit, browsing the data warehouse, efficient data mining,
organic periodicity, integrating data channels, 3D business models and
working without budgets because they are believed to be a constraint to
development (Jenkins, 1998). Another prediction is that the need for
management accountants will fall while the need for MA will rise (Cooper,
1996); Coopers point is that traditional second-wave management

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Management Accounting in the New Economy

accountants have no future in the New Economy. This notion is also


introduced by Anastas (1997) stating that there will be fewer management
accountants but at more senior levels. Cooper also has similar views to
that of Anastas who writes: decentralising the MA process and
empowering the workforce result in fewer management accountants but a
much wider use of MA information (Anastas, 1997). There is a shift in the
role to becoming more internal consultants, motivating others to change,
finding ways to stay profitable and ahead of competition (Jenkins, 1998)
for the change in management accountants role from 1999 to 2010) can be
seen in the following Figure (2).
The Management Accountants Role from 1999 to 2010
1999
Functional focus
What?
Inward looking
Backward looking
Alchemists/scientists
Accountants
Country based
Slaves to technology
Separate overhead department

2010
Holistic focus
Why? And How?
Outward looking
Forward looking
Analysts and teachers
Controllers/ information managers

Global
Masters of technology
Integrated specialists

Source: Jenkins, M. (1998).

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Dr. Adel E. A. Abobaker Efkirin

They will also be expected to have knowledge of all areas of the


organisation and have commands of the latest IT software. The MA of the
future will, it seems, need to be an effective and persuasive decisionmarker: MA has begun to evolve beyond historic cost data and reports
designed to control results against financial plans (Nanni et al., 1992).
Change in the future is dependent on many factors, development of
technology being the main factor. Firms will have to rethink the nature of
their core competencies and acquire new ones that will shape their future
(Prahalad, 1998). According to Nixon et al. (2002) features of the new
economy are the speed of change, hyper-competition, virtual organisations,
E-Commerce, an increasing dependence on intellectual capital for
competitive advantage and greater dependence on alliances and various
collaborative arrangements in order to manage risk, acquire technology and
gain access to markets. As Nixon, et al (2002) illustrate the development of
New Economy phrase can be understood by the following Figure (3):

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Management Accounting in the New Economy

Agricultural wave 8000bc to 1800 (1st Wave)

Industrial wave 1800 to 1960s (2nd Wave)

Information wave/ New Economy/ Digital Economy

Biotech Economy wave to come with the ability to manipulate the generic
code of living things

Source: Nixon, et al. 2002


Managing

the

competencies

identified

in

multi-cultural

environment where people have different views requires management to


absorb and combine new streams of knowledge and arrange competencies
across business units perimeters. The discontinuities (Prahalad, 1998)
identified will force firms to compete globally, focus on speed as a major
issue, use temporary alliances and collaborative agreements and re-evaluate
the business model.

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Dr. Adel E. A. Abobaker Efkirin

Any one of these factors can be managed with some difficulty but
survival in the New Economy requires that all of these forces are managed
simultaneously.
This is the major challenge that management accountants face in the
new economy and in the future. Kaplan (1994) suggests that management
accountants should become part of their organisations value-added team,
participate in the formulation of strategy, translate strategic intent and
capabilities into operational and managerial measures and move away from
being scorekeepers of the past to becoming the designers of the
organisations critical future.

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Management Accounting in the New Economy

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Dr. Adel E. A. Abobaker Efkirin

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